1. Directors’ Assembly
March 9, 2010
Between Rocks and Whirlpools: Bank Strategy 2010
2. Required Disclosures
The following information is for informational purposes only and was prepared from sources
believed to be reliable but is not guaranteed as to accuracy and is not a complete summary
or statement of all available data. The views or opinions expressed in this material are solely
those of the speaker/author and do not necessarily represent those of Janney Montgomery
Scott LLC.
Janney Montgomery Scott LLC is a broker-dealer registered with the US Securities and
Exchange Commission and member NYSE, FINRA, and SIPC.
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3. Speaker Credentials: Roger G. Powell
Native of Fayetteville Experience
Former Scoutmaster,
Troop 17, Christ Investment Banking Janney Montgomery Scott (2008 - )
Church, Charlotte Banks / Thrifts Alex. Brown & Sons1 (1990-1999)
Interests: family, Mortgage Companies
American history,
antique maps, Credit Card
conservation and Issuers
outdoor activities
Processors
Commercial Finance
Academic Investment Research Alex. Brown & Sons (1983-1990)
Banks / Thrifts The Powell Group (1972-1976)
Mortgage Cos
B.A. Economics 1971 Davidson College, Davidson, NC
Credit Card Cos
Asset Managers
Certificate, Advanced North Carolina School of Banking, Corporate Development / Deutsche Bank AG2 (2000-2007)
Management Program Strategic Planning United Carolina Bancshares (1976 – 1982)
Chapel Hill, NC
1978
1 Andsuccessors: BT Alex. Brown and Deutsche Bank Securities d/b/a Deutsche Bank
Alex. Brown
2 Global
Private Client Group and Deutsche Bank Alex. Brown, a business unit of Deutsche
Bank Securities Inc.
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4. Rocks and whirlpools: the sailor’s fear…
Adm. Shovel’s fleet on the Rocks of Scilly, 1707
National Maritime Museum Picture Library, Greewich, England
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5. Rocks and whirlpools…
Adm. Shovel’s fleet on the Rocks of Scilly, 1707
Admiral Cloudsley Shovel – a 26 year veteran of the most advanced and powerful naval power of the time – lost his
flagship, his life and ~2,000 sailors and marines along with a large part of his fleet on the Scilly Isles in 1707.
He knew the islands were there – they are well known to English, Irish and Cornish sailors – off of Cornwall at the
entry of the Irish sea.
He did not know where he was and an storm drove the fleet upon the rocks.
This disaster, the greatest in the history of the British fleet, incited the Lords of the Admiralty to offer a prize for the
maker of an accurate chronograph in order that navigators could accurately compute their longitude.
As a banker you know the rocks in your course – the known risks of the business. You must always know where
you are relative to those risks by using the best techniques of navigation. Do not let a storm throw you upon t he
rocks.
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6. Rocks and whirlpools…
Maelstrom of Lofoten, Norway
New-York Magazine; or, Literary Repository Of the celebrated WHIRLPOOL called the MAELSTROM on the Coast of Norway, Vol. II No. XII Dec 1791
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7. Rocks and whirlpools…
Maelstrom of Lofoten, Norway
Whirlpools rise from action of tide and wind, generally in narrow channels.
The most famous is off the coast of Norway and was named ‘Maelstrom’ by Dutch sailors.
A small vessel can be destroyed by its action.
To avoid a whirlpool requires adquate flotation and power to avoid its force.
The tide of regulatory vigor has set with full force; the wind of the economy has blown Force 5.
Capital is a bank’s flotation; earnings is its power. It takes both to avoid the vortex of the Maelstrom.
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8. Goal: avoid the known risks; be able to survive the unknown.
Rocks
You know where they are.
Where are you?
Can you be blown upon them?
Whirlpools
Arise with winds of regulation and economic tides; you will not see them until you are upon
them.
Are you large enough to survive?
Do you have enough flotation, i.e. capital?
Can you power, i.e. earn, through them?
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9. For 2010 Strategy cycle: focus on critical themes
Position
versus changing competition
relative to your balance sheet risks
Capital
to survive
to thrive
to earn
Control
of operations and risk position
of message and information
of future
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10. Position: versus competitors
Secular
Banks lose share to capital markets
Consolidation creates highly competitive markets
Capital markets pricing and structure degrade overall bank pricing
Portfolio mix responds to disintermediation of cards, cars and mortgages
Cyclical
Risk cycle takes away momentum
risk realization exceeds trend after a decade below-trend
Asset quality and capital issues distract management
Competitive banks have opportunity
Regulators as referees
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11. Position: versus competitors
Banks lose share to capital markets
Shifting Shares of Major Non-Bank Players in Credit Provision
[Ex cludes Credit Market Assets Held by Federal Reserv e]
100%
Percent of Total Credit Market Other Credit Providers
Assets Held by Financial
Sector Money Market
80% Credit Providers Mutual Funds
Insurance Cos.
"Private Label" MBS Issuers,
Pension Funds
60% and Consumer Credit &
Business Credit
ABS Issuers
40% Government Sponsored
Banks Enterprises
(Commercial Banks, Bank Holding
Cos., Thrifts, Credit Unions)
20%
Source: Figure A1. in Susan Hickok and Daniel E. Nolle, "The U.S. Financial System in 2011: How Will Sufficient Credit Be Provided?"
Economics Working Paper 2009-6, Office of the Comptroller of the Currency (Nov. 2009).
0%
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
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12. Position: “A Banking Battleground”
Source: New York Times, March 6, 2010 “A Banking Battleground”
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14. Position: versus competitors
Portfolio mix responds to
Loan Portfolio Composition
December 31, 2002 December 31, 2009
Commercial Real Commercial Real
Residential
Estate Estate
25% 15%
Residential 12%
30% Credit Cards
6%
Credit Cards
6%
Other Consumer
10% Other Consumer
9%
Agriculture *
Agriculture *
1%
1%
Leases Leases
3% Commercial & 2%
Commercial & Industrial Construction
Construction
Industrial All Other Loans 17%
5% All Other Loans 6%
19% 14% 19%
* OTS – Supervised Savings Associations do no identify agriculture loans.
Source: FDIC Quarterly Banking Profile 4Q:02 and 4Q:09
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15. Position: versus balance sheet
Below-trend risk realization ends
3.00 3.00
2.50 2.50
2.00 2.00
1.50 1.50
Average ’84-’09 = 0.84%
1.00 1.00
0.50 0.50
0.00 0.00
Mar-84
Mar-85
Mar-86
Mar-87
Mar-88
Mar-89
Mar-90
Mar-91
Mar-92
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Source: Federal Reserve Bank of St. Louis
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16. Position: versus competitors
Asset quality and capital issues distract management
Banks Headquartered in NC with NPAs / Assets > 4% at 12/31/09
30
25 24
20
15
10
6
5
1
0
> $10 bn $1 bn - $10 bn < $1 bn
Source: SNL Financial.
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17. Position: cyclical opportunity
Opportunity for active banks to take share by becoming a strategic partner
Historical advantage of commercial banks: information advantage
View of cash flows
Intimate business analysis
Collateral ties
Regulators are the referee
Regulatory vigor animates the board room
Banks become the ‘whipping boy’ of the economy
The savings & loans are no longer the instrument of housing and economic policy
Winners / Losers
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18. Capital
Secular Trend
Reversal of trend to lower tangible equity levels
Basel II was height of trust in risk models and infinite liquidity
“The new 10% is 12%” and etc.
What ROE translates to premium share price?
Portfolio mix responds to disintermediation of cards, cars and mortgages
Cyclical Factors
Access degraded, especially for ‘micro-cap’ and smaller
Trust preferred reverts to single-issuer – no longer ‘just-in-time’ for all
Internal capital growth depends upon earnings retention
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20. Capital: what is good performance?
What ROE translates to premium share price?
Investor attention turns to ‘pre-provision normalized earning rate’
If asset quality is seen to be stable or improving, THEN bank earnings matter
SPDR S&P 500 Index ETF: 21.2% trailing ROE a/o 2/28/2010 (β~1.08)
SPDR KBW Bank ETF: 0.14% trailing ROE (β~2.35)
Investors have abandoned ‘micro-’ and ‘nano-cap’ stocks
Large-cap = $8 billion common equity value and larger
Mid-cap = $1 < $8 billion common equity value
Small-cap = $250 million < $ 1 billion common equity value
Micro-cap = $50 million < $250 million common equity value
Nano-cap = less than $50 million common equity value
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21. Capital: equity market access degraded
Market access degraded, especially for ‘micro-cap’ and smaller
Capital Raising in 2009 By Institution Asset Size ($MM)
Senior Debt
Subordinated Debt
TRUPS
TARP Preferred
Preferred
Common
$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000
Common Preferred TARP Preferred TRUPS Subordinated Debt Senior Debt
<$1.0B 554 126 1,491 16 35 176
$1.0B - $25.0B 11,045 1,412 3,752 405 297 404
$25.0B - $100.0B 6,330 1,800 - 935 1,500 960
>$100.0B 94,331 64,137 30,000 32,984 710 24,775
Source: SNL Financial.
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23. Control
Secular Trend
Tolerances are small in low growth environment
Margins remain under pressure
Fee sources under attack
Internal controls must tighten in response to demanding operating conditions
‘Big Bank’ risk management systems become ‘best practices’
Cyclical Factors
Regulatory pendulum swings to full vigor
Governance issues take higher profile (SarbOx and fiduciary law developments)
Public relations demand high resolution
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24. Control: secular factor response
Tolerances are small in low growth environment
You must manage the details all day every day
Margins remain under pressure
Pricing degradation is permanent – find a niche where you can
Fee sources under attack
Populism and consumerism go hand-in-hand and marry in post-recession scenarios
Internal controls must tighten in response to demanding operating conditions
While you must retain marketing momentum
‘Big Bank’ risk management systems become ‘best practices’
How can you efficiently implement enterprise risk management?
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25. Control: cyclical factor response
Regulatory pendulum swings to full vigor
Position statements from Washington may not jibe with examination outcomes
Governance issues take higher profile (SarbOx and fiduciary law developments)
Financial statement certification is serious
Prudential management is serious
Public relations demand high resolution
Say only what you mean to say
Be able to defend everything that you say
“Never write if you can speak; never speak if you can nod; never nod if you can wink”.
-attributed to Martin Michael Lomasney (December 3, 1859 -August 12, 1933), Boston politician
“never put it in email”
- attributed to Eliot Laurence Spitzer (born June 10, 1959), New York politician
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26. Rocks and whirlpools…
‘Old Sow’ – the largest whirlpool in the western hemisphere
Between Deer Island, N.B. and Eastport, Me
Watch out, you sport kayakers!
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27. Janney Montgomery Scott Contact Information
JMS Contact Telephone Email Location
Cliff Booth, Head of FIG Practice 410-583-5992 cbooth@janney.com Baltimore / Philadelphia
Ed Losty, Head of Bank Practice 757-564-9737 / 215-665-4491 elosty@janney.com Virginia / Philadelphia
Roger Powell, Managing Director 410-583-5993 / 215-665-6687 rpowell@janney.com Baltimore / Philadelphia
Jay Junior, Managing Director 215-665-4497 jjunior@janney.com Philadelphia
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